Don't Bet Against the Bulls

The second quarter kicked off with V-shaped-bounce action. The market managed a close at the highs of the day, but most impressive was many of the momentum names came back to life. Virtually all the high-beta stocks that led in February and then collapsed in March saw good buying today. Names like Tesla(TSLA), Google (GOOG), and Chipotle (CMG) had their best days in quite a while.

Breadth was very solid at better than 4-to-1 positive on good volume. Many momentum traders are anxious to jump back in, and that has always been what drives V-shaped bounces. I certainly will give the bulls some room to the upside.

One concern about the action was the number of bulls giving each other high-fives. There seemed to be real euphoria over the bounce action. That isn't a very good contrary indicator, but it does mean that some folks may be pressing a bit too hard.

The big challenge is putting cash to work. It makes sense to look for failed bounces, but that caused many bulls to be underinvested over the past year or so. This market doesn't make it easy to enter once it starts running.

Another V-shaped bounce or will it be different this time? The conditions are definitely different, but betting against the bulls has been a consistent loser.

Have a good evening. I'll see you tomorrow.

April 01, 2014 | 1:33 PM EDT

The Real Cost of HFT

It has perverted the trading environment and changed all the rules.

Gary Kaminsky of Morgan Stanley's wealth management business appeared on CNBC this morning to discuss the uproar over high-frequency trading (HFT). His view is that HFT is mostly irrelevant for individual investor.

Perhaps it is irrelevant to Kaminsky's clients, as they have entrusted their funds to his firm and probably have little knowledge of what the real cost of HFT may be. I'm not sure what sort of return Morgan Stanley generated for its clients, but in 2013 the majority of funds grossly underperformed the indices and hedge funds had one of their worst years of underperformance ever.

There are a number of reasons for that, including the Fed and its market "manipulation." Another part of it is that HFT extracts some profits by way of legalized front-running. But the real issue is that HFT screws up the way stocks trade. It isn't the billions in pennies that HFT has taken out of the market that is the real cost; it is the impact on the way stocks trade that have cost many funds and active traders.

I have written hundreds of articles about the market's tendency toward V-shaped moves. That is largely a consequence of HFT. In order for the HFTs to make money, they have to keep pushing stocks in one direction so they can buy and then resell higher. It has perverted the trading environment and caused revisions to many of the standard rules of technical analysis. For example, volume is not nearly as meaningful as it once was.

I admit that my dislike of HFT is selfish. I prefer that stocks move in a normal manner that reflects the emotions of human beings. One of the things I've always enjoyed about trading is the psychology of fear and greed that comes into play, but HFT has corrupted that process. To gain an edge, we are now forced to think like computer programmers who want to manipulate and exploit the way the market moves.

Some claim that HFT is no different from the specialist system that "rigged" trading in many stocks. The difference is that along with their franchise and the ability to see order flow, specialist had the obligation to make an orderly market in stocks. They would provide support when needed. HFTs only have one mandate: to extract profit. They have no obligation to make an orderly market and really don't care how stocks act.

Markets will always be manipulated in various ways, but solving some of the abuses of the HFT system is simple and easy, and it would go a long way toward bringing back individual investors who have believed since 2008 that the market is rigged. We didn't need a book to make the point about how the market appears unfair. Individual investors have been saying that for years.

I'm surprised by how many people are coming to the defense of HFT. I suspect if the market hadn't been trending up for five years that the outrage would be exponentially higher. In a poor market, HFT would be viewed even more critically than short-selling. Ironically, HFT has helped to create this endless uptrend and that is cause for much forgiveness in the land of buy-and-hold.

April 01, 2014 | 10:48 AM EDT

Seems Like Old Times

Second quarter starts off just like the first.

The start of the second quarter looks just like old times. The biotechnology sector and high-beta stocks like Tesla(TSLA), Google (GOOG) and Priceline (PCLN) are bouncing well as the momentum money chases. Breadth is running 2-to-1 positive as fear of being left behind kicks in.

The first day of a new quarter has a strong positive tendency and traders often make such things self-fulfilling. With many stocks oversold and near support levels, the timing is very good for bounce trades.

The more important question is whether this action is the early stage of another February-like run. After a poor January, February started slowly, but once the bounce started the S&P500 put together eight straight positive days and right back to the highs.

This situation is quite different because of the rotation in leadership, but the dynamics of chasing the bounce are similar. Momentum investors with a time frame longer than a day or two aren't going to trust this action. They want more proof and better leadership before they embrace this action, but I'm sure the bulls are already anticipating another move.

I haven't been doing much other than a few short-term trades like Highpower International (HPJ), but I am not building any longer-term positions. My plan is to stay short-term opportunistic and not anticipate a recovery as easy as February's.

April 01, 2014 | 8:24 AM EDT

Buy Cautiously at the Crossroads

The DJIA and S&P 500 are grossly misleading right now.

You may have a fresh start any moment you choose, for this thing that we call 'failure' is not the falling down, but the staying down. --Mary Pickford

On Monday we wrapped up the worst first quarter in five years with a decent bounce but the market is at an important crossroads as we await the start of earnings season.

The vicious rotation that recently kicked in is still playing out, but there were some signs of stability Monday -- which has the bulls daydreaming about the possibility of another V-shaped recovery.

The bounce Monday was due in part to some reassuring comments from new Fed Chairwoman Janet Yellen who reiterated the Fed's commitment to provide 'extraordinary' support to the U.S. economy. Some good old-fashioned window dressing helped to boost stocks as well, but it was conservative large-caps like Microsoft (MSFT), IBM (IBM) and Johnson & Johnson (JNJ) that did most of the heavy lifting.

The pattern of the market for quite some time has been to quickly shrug off any worries or concerns and quickly regain its footing. This happens just as the bears were starting to believe that this could finally be the big correction they have been anticipating for so long. The bears have consistently found themselves out of position just as the market shifts and starts to regain its upside momentum.

The big difference this time is that the market has undergone a major transition under the surface. Momentum leaders likeTesla(TSLA), Google (GOOG) and Facebook (FB) have fallen by the wayside while market players have moved into old technology, low beta and defensive names. We haven't seen a rotation like this in a very long time and it signal a major change in market character.

The bulls argue that this is a healthy shift. The market is moving from expensive and downright frothy stocks into things that represent much better values. They believe that these stocks can be the leadership that takes the market higher.

The bears respond that this shift in leadership is not healthy. When market players move into more conservative stocks and drop the high beta momentum names it is an indication that they are worried about the health of the market. And that they are more likely to be playing defense rather than offence. Strong markets are always lead by high beta stocks because that is the way to make the most money.

Leadership is always a key to market health and until we see some of the higher beta names act better it is going to be difficult to really embrace this market action. The DJIA and S&P 500 are grossly misleading right now and either the momentum names are going to reverse pretty soon or the senior indices will stall out.

It is the first day of a new quarter which tends to have a positive bias as new money is put to work and money managers try to start off strong with some good relative performance. It will be interesting to see how much interest there is in the key momentum names that have been struggling for a few weeks now.

While I won't be at all surprised at more upside bounce in this market I see no reason to believe that the recent correction has played out. I have plenty of cash to put to work and will make some selective buys if I can find them. But I'm no rush at all to jump into this market in hopes that yet another V-shaped bounce will occur.

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